When does IR35 apply?

The introduction of IR35 to the private sector is currently due to happen during April 2020, just in time for the next financial year. However, the anti-avoidance tax legislation has been in effect in the public sector since April 2017.

Once we enter the new financial year and IR35 is applied to the private sector, contractors will no longer be responsible for self-assessing their tax status and the obligation will be moved to the employer.

HMRC are introducing this change as the current system has been proven to be ineffective. Currently, non-compliance costs are set to escalate to £1.3bn by the 2023/24 tax year and the new method is designed to reduce the figure.

Alongside this, it makes it easier for HMRC to cut down on what they call ‘Disguised Employees’, contract workers who fill a permanent position in a company while still reaping the tax benefits.

The government want to cut down on contractors taking advantage of tax benefits while working as a normal permanent employee. Therefore, those found to be within the IR35 and described as disguised employees will only be entitled to receive payments on a PAYE basis.

While the new legislation is not applicable for another few months, private sector contractors and the companies they work with have already needed to prepare to ensure they avoid falling on the wrong side of the regulation.

One of the strongest reactions to IR35 has come from HSBC who announced they wouldn’t be assessing contracts. Instead, they offered an ultimatum, become full-time employees or leave. However, while taking all contractor work in-house may seem like a simple way to avoid any IR35 compliance issues, there’s a worry the bank won’t be able to retain experienced talent.

The extension of IR35 to the private sector is estimated to affect 170,000 individuals as both employers and contractors review their working relationships to ensure they are as compliant as can be. For employers, the past few months should have been spent ensuring the company has the relevant processes and policies in place to make sure the new legislation is managed properly.

Meanwhile, contractors who have spent their self-employed career determining their tax status will need to talk to the hiring company. This allows them to make sure the right steps are being taken to comply with the new rules.

While legitimate contractors shouldn’t have an issue, the risk of losing salary, building interest and incurring penalties means that they should be evaluating their relationships with employers.